The Crystal Ball of Antitrust Regulators Is Cracked

Blockbuster store in Broomfield, Colo., in 2011. (Rick Wilking/Reuters)
They should remember that the giants of today could soon join the Blockbusters and Polaroids of yesterday.

NRPLUS MEMBER ARTICLE O n July 27, CEOs from four of the largest U.S. tech companies — Amazon, Apple, Facebook, and Google — will testify before Congress on competition in the digital marketplace. This follows a large wave of anti-tech backlash premised on the idea that modern tech giants have a disproportionate amount of market power and control. Many observers notice the size of these tech companies and struggle to imagine how they might ever face meaningful competition in the absence of government intervention. But history provides us with some much-needed perspective on how fast things can change in the modern tech economy.

Rewind the clock 15 years, to 2005, and try to remember what you did when you wanted to rent a movie. Chances are that you would drive to Blockbuster or Hollywood Video to get a physical DVD, or even a VHS tape. Today, that ritual seems antiquated and, in the midst of our current lockdown, even a bit dangerous. Yet, millions of people did it every week.

But then a giant wave of creative destruction came crashing down, first in the form of online rentals by mail, and then instantaneous video streaming via high-speech broadband networks and dozens of video streaming platforms. Blockbuster’s downfall was gradual, but everyone knew it was coming. Just one Blockbuster store remains open, in Bend, Ore., and it has become a kind of tourist attraction, standing as a relic of a bygone technological era. Hollywood Video is long gone.

Back in 2005, antitrust regulators apparently didn’t think this could happen, and the Federal Trade Commission (FTC) moved to derail the merger of the two video-rental giants. Under the traditional antitrust playbook, that made some sense: It was a “horizontal merger” of the two market leaders in the field. From the regulatory perspective, that would have almost certainly resulted in excessive market power and harmed consumer welfare.

Static Snapshots Meet Fast-Moving Tech Markets
Unfortunately, that traditional way of thinking reveals many cracks in antitrust’s crystal ball. After all, antitrust involves a bit of prophesying. Regulators must look at the situation on the ground one day and try to predict how it might change going forward, with and without antitrust intervention.

In this case, FTC antitrust officials defined the relevant market for video rentals in an extremely narrow way. They could have looked at the situation from a holistic perspective and, seeing that competition could come from multiple sources in unique and different ways, simply considered what might have enabled Americans to watch what they wanted. Instead, FTC officials confined their definition of “competition” to a small subset of similarly situated firms.

Rather than adopting a perspective that takes into account dynamism, innovation, and the creative process, they defined the relevant market as a niche of a niche of a niche. In this case, FTC officials essentially believed that Blockbuster and Hollywood Video were out to monopolize the market for video programming by way of monopolizing the process of renting a video on a tangible piece of plastic from a brick-and-mortar store.

Even in 2005, that was already becoming yesterday’s video-rental marketplace, not the marketplace of the future. FTC regulators did not need to look very deep into their crystal balls to imagine the future of video rentals. They only needed to read the newspaper headlines of the time.

The question most independent market analysts were asking at the time was not whether new forms of online video would emerge that would displace the traditional model. Rather, they were wondering when that would happen and who would lead the charge.

Netflix was already a candidate, even though the DVD-by-mail company had yet to develop its video-streaming model that would serve as the final death blow for brick-and-mortar video rental. Movielink was another candidate because it had the backing of several entertainment-industry giants. Blockbuster even ended up acquiring the service in 2007 in a last-ditch attempt to stay relevant, but it faltered and was abandoned just a year later. Others predicted that video-game platforms would become the key hubs of video rental, which today are largely secondary players in this diverse and ever-changing market.

And then there is what even the best forecasters could not yet envision: the degree to which smartphones and wireless networks would disrupt the market. In 2005, we were still in the era of flip-phones and sketchy mobile connections. Two years before the first iPhone hit the market, most people were just happy when a phone call wouldn’t drop out on them. The idea that they might be able to watch an entire movie (steaming in high definition, no less) on phones or something called a tablet was almost unthinkable.

Today, of course, we enjoy all of these things with a virtually unlimited range of options. We get angry when streams freeze up or get glitchy for even just a few seconds, forgetting how difficult watching online video was only a decade ago. How quickly we forget about dial-up tones ringing in our ears.

Finally, market analysts failed to predict how the video marketplace would become largely unbundled and à la carte in nature. Just four years ago, people were afraid that Netflix was becoming the next monopoly. Instead, today’s “streaming wars” pit a wide variety of content aggregators against one another: Amazon, Disney, ESPN, HBO, Hulu, Netflix, Showtime, and even older giants such as CBS and NBC. These options have disrupted not only the old video-rental marketplace but also traditional cable and satellite TV, which are now on the decline, too.

Even in light of these amazing changes, a skeptic might still suggest that the FTC was right to block the Blockbuster–Hollywood Video merger. Perhaps that move unfairly accelerated the advent of online video and wireless streaming competition. But that’s a real stretch, to say the least. Video distribution technologies and platforms were already multiplying.

Moreover, why should Blockbuster and Hollywood Video have been punished for seeing the writing on the wall and acting to survive before the online video tsunami hit? Perhaps a merger could have created another serious competitor in this emerging marketplace. Instead, much like MySpace, AOL, and Palm, Blockbuster has become the punchline in jokes about a bygone technological age.

Lesson: Regulatory Humility Matters
The lessons that antitrust regulators should derive from this history can be summarized in two words: Be humble. As Yogi Berra famously said, “It’s tough to make predictions, especially about the future.”

There is no discernable end point to the process of entrepreneurial-driven change. In fact, it seems to be proliferating rapidly. To survive, even the most successful companies must be willing to quickly dispense with yesterday’s successful business plans, lest they be steamrolled by the relentless pace of technological change and ever-shifting consumer demands. It is easy to understand why some people find it hard to imagine a time when Amazon, Apple, Facebook, and Google won’t be quite as dominant as they are today. But it was equally challenging 20 years ago to imagine that those same companies could disrupt the giants of that era.

Take Polaroid and Kodak. Once household names in photographic imaging technology, these companies essentially had a stranglehold on the instant-photography market — making “Kodak moment” a household term. There was even antitrust action taken against Kodak for the power it was thought to have over secondary repair markets. Yet those companies started to lose market power at an aggressive rate in the 1990s and, by 2012, both had gone bankrupt.

Why? The advent of digital photography. Two massive companies that together had nearly complete market power essentially crumbled under the weight of creative destruction. No antitrust lawsuit could ever hope to accomplish what digital innovation was able to do over the span of just a couple of years.

Antitrust should not be premised on static thinking about past or even present markets, and regulators should be careful about thinking that their crystal balls can easily predict the future. Regulators don’t necessarily need to abandon their thinking, but they should exercise humility and remember that the giants of today could soon join the Blockbusters and Polaroids of yesterday.

The market is a robust process that is better at displacing entrenched interests than regulators could ever hope to be. If our public officials fail to recognize this, we will continue to waste time and effort on using antitrust to solve the problems that are already fading into the past, rather than focusing on the possibilities of the future.

 Adam Thierer is a senior research fellow and Trace Mitchell is a research associate with the Mercatus Center at George Mason University.

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